Bitcoin is losing its status as the cryptocurrency of choice for large professional investors, who are turning to its biggest rival Ethereum and ploughing millions of dollars into a fund holding the fast-rising coins.
Large investors last month traded $250m (£183m) of shares in Grayscale Ethereum Trust, the biggest fund investing in the cyrptocurrency, overtaking trading volumes in the Grayscale Bitcoin Trust, the world’s biggest Bitcoin fund, for the first time.
Trading volumes in the Ethereum fund were up 29pc month-on-month, compared to just 8.6pc for Grayscale Bitcoin Trust.
CryptoCompare, a data provider, said levels of trading in cryptocurrency funds were a good gauge of institutional investor behaviour. The funds, whose shares trade on America’s stock market, are popular among large investors as they are easier to buy and hold then the cryptocurrencies themselves.
“These products make cryptocurrencies more accessible to investors because they can be traded on traditional stock exchanges, with the complexities of custody and storage handled by another party,” said CryptoCompare.
However, American fund manager Grayscale’s $30bn Bitcoin Trust and $9.9bn Ethereum Trust are not available to British DIY investors through brokers.
Ethereum’s rise in popularity means it now accounts for 26pc of all cryptocurrency funds. Bitcoin is still on top, accounting for 68pc, but its lead is shrinking, with assets held in funds investing in Bitcoin falling by 8pc last month. “This movement suggests that investors are seeking alternatives to Bitcoin for cryptocurrency exposure,” said CryptoCompare.
Ethereum has risen in value by 356pc this year, nearly six times Bitcoin’s 62pc rise, to $3,333 per token, compared to the $47,500 cost of Bitcoin.
Ethereum is a cryptocurrency, like Bitcoin, which runs on its own “blockchain”, an online ledger which tracks the transfer of information. Ethereum’s blockchain is increasingly being touted as the future of digital assets as, unlike Bitcoin’s, it allows for other applications to be run on its software.
It was created by Vitalik Buterin in 2013, a developer who was just 19 at the time. His vision was for a decentralised payment network, with its own cryptographic currency, that allowed anonymous payments to be sent across the internet without the need for a bank or other third party.
A number of apps are being built on Ethereum’s blockchain, and the network is also being used by start-ups to raise money with initial coin offerings, which exchange Ethereum or other currencies for special “tokens” that grant access to a service.
Should I buy Ethereum and how can I do so safely?
The same arguments for buying or avoiding Bitcoin can be applied to Ethereum. Sceptics argue that cryptocurrencies have no intrinsic value, could face regulatory hurdles which would block people from buying them, and are too volatile to ever become a reliable store of value or medium of exchange.
Fans counter that trust in cryptocurrencies is built on their “incorruptible” blockchain ledgers and a limited supply of coins, which provide a sound store of value.
What is certain is that any cryptocurrency investment is likely to be volatile, so it is not for investors who may need to cash out in the short term. Cryptocurrency investments should also be held as part of a balanced portfolio, alongside mainstream assets like stocks and bonds.
Charles Randell, chair of City watchdog the Financial Conduct Authority, last month warned investors over cryptocurrency promotions from celebrities. He cited a post from Kim Kardashian on Instagram, the social media platform, promoting “Ethereum Max”, a speculative digital token unrelated to Ethereum, to her 250m followers.
“I can’t say whether this particular token is a scam. But social media influencers are routinely paid by scammers to help them pump and dump new tokens on the back of pure speculation. Some influencers promote coins that turn out simply not to exist at all,” he said.
Ethereum is available on most cryptocurrency exchanges. The largest include Coinbase and eToro. eToro does not charge transaction fees on Ethereum but there are fees for withdrawing the coins from the exchange.
Coinbase has different fee tiers, with transactions under $10 (£7) costing £1 and a £3 charge on deals between $50 and $250. Any purchase over $250 carries a 1.49pc fee for British customers.
Investors also have to pay a spread – the difference between the buying and selling price – which tends to come in at around 0.5pc.